NY futures continued to trend lower this week, with December dropping another 50 points to close at 64.74 cents.

Although the sentiment seems to have turned a little more negative in recent weeks, the market has so far not been able to generate any meaningful downside momentum and closed the week right by its 200-day moving average, which calculated today at 64.68 cents.

The most recent CFTC report showed virtually no change in the spec net long position during the week that ended on July 14, and since open interest has hardly changed since then we have to assume that speculators have so far been hanging on to their 5.5 million bales net long position. Index funds owned the remaining 6.6 million net long position, while the trade was 12.1 million bales net short.

Even though there has been some business done for nearby shipment, as mills are trying to bridge themselves to new crop, there are hardly any forward transactions being concluded at this point. This is due to a standoff between growers and mills, as price ideas between the two parties are probably at least 500 points apart at the moment. In the US, which accounts for nearly a third of global cotton exports, growers are still waiting for December to move towards 70 cents before letting new crop cotton go, while mills will only consider forward business at heavily discounted prices.

The weather over the next 2-3 months will ultimately decide who has the stronger hand in this standoff. If the Northern Hemisphere crops live up to their current potential, it should generate enough harvest pressure to force prices lower. However, if some of these crops were to run into trouble, especially the US or Indian crop, then mills may have to pay up.

The US crop as a whole still looks promising at this point, although most of the cotton belt has experienced a heat wave since early July and many areas are in need of some rain. The Delta and Southeast should get some moisture over the coming days, while conditions for West Texas look dry in the week ahead as another high pressure system takes hold over the area. The next few weeks will be important in regards to fruit retention, since a prolonged period of hot and dry weather could lead to fruit shedding and lower yield potential.

Further down the road the US crop will have to contend with a strengthening El Niño, which may bring colder than normal temperatures and wetter conditions around harvest time. Current models predict that a currently “moderate” El Niño will likely be upgraded to a “strong to very strong” phase by the end of this month, which may rival the record setting events of 1982/83 and 1997/98.

A strong El Niño could also cause problems for the Indian Monsoon, although over the last few days there has been some very beneficial rainfall in most states, especially in the Kutch and Saurashtra regions of Gujarat, which have been lagging 30% behind normal. Thanks to a positive Indian Ocean Dipole (IOD) the negative effects of El Niño are being mitigated, although a positive IOD tends to produce above average rainfall in the eastern and southern regions of the subcontinent, whereas the western seaboard and northern areas typically experience below average precipitation.

According to the Japanese national weather agency this setup is likely to continue into August and September, but that doesn’t necessarily translate into a problem for the Indian crop. As long as Gujarat and Maharashtra, which account for nearly half of the Indian crop, get some rain every once in a while like they did this week, they should be able to produce a decent crop.

US export sales for the week ending July 16 came in at 141’400 running bales, of which 93’700 running bales were for prompt shipment and 47’700 running bales were for August onwards. There were still 17 different markets competing for a share of readily available US cotton, with Vietnam once again booking the largest amount. Shipments remained strong as well at 178’100 running bales, reducing outstanding sales to less than 900’000 bales.

For the current season we now have total commitments at 11.8 million statistical bales, of which 10.9 million bales have so far been exported. Sales for the 2015/16 marketing year are at around 1.85 million statistical bales, which is just slightly more than half of what was sold a year ago at this juncture. Factoring in a carryover of around 600 bales and some additional new sales over the next two weeks, we will probably start the new season on August 1 with just 2.6 million statistical bales on the books, which is the lowest amount since 2009. By comparison, in the pervious five years commitments at the beginning of the season amounted to between 3.3 and 6.8 million statistical bales.

So where do we go from here? From a technical point of view the market remains flatlined, with absolutely no momentum whatsoever. Speculators are still hanging on to their recently acquired longs, but we wonder how much longer they will give this lackluster market the benefit of doubt. A breach below an uptrend line dating back to late January that currently runs through around 63.70 would likely start the flush out process, beyond that we have important support levels at 63.00 and then at 61.00 cents.

From a fundamental point of view we are still in a weather market, which is why traders are hesitant to discount prices at this point. However, if the US and Indian crops continue to develop without any major setbacks, we expect price pressure to build as we head into fall. Given the slow demand and weak yarn market, the odds seem to favor lower prices going forward!